2019 Theses Doctoral
Essays in International Finance and Banking
This dissertation studies the implications of financial intermediaries on international financial markets and bank lending.
Chapter 1 explores the relevance of financial intermediaries for the pricing of foreign exchange. Recent theoretical work has highlighted the importance of financial intermediaries in rationalizing exchange rate movements and I empirically assess whether the theoretical predictions hold true in the data. I show that financial intermediary capital, a proxy for their health and/or risk-bearing capacity, provides an economic source of risk that helps explain both the carry trade and the cross-section of currency returns across a variety of strategies. Currencies that more positively co-move with intermediary capital provide high excess returns as intermediaries must be compensated for currency depreciation and losses at times when their capital erodes and their marginal utility is high. I demonstrate the dominance of intermediary-based asset pricing theories over consumption-based asset pricing theories, thus rationalizing theoretical models with a central role for financial intermediaries in asset markets. I then show that intermediary capital provides one economic source of risk embedded within the more dominant carry factor and serves as an orthogonal source of risk to the global risk embedded within the dollar factor. This paper thus serves as motivation for the further development of open economy models with financial intermediaries and a deeper understanding of the underlying economic sources of risks that underlie the factor structure of exchange rates.
Chapter 2 studies the impact of US monetary policy shocks on international bank lending at the aggregate level. I ask whether country-banking systems that are more exposed to dollar funding decrease their cross-border lending by more than less exposed countries following contractionary US monetary policy announcements. For a given country borrower, I show that this is indeed the case as a 25 basis point increase in the previous quarter decreases cross-border lending supply growth by 4% more from a country-banking system that is 10% more reliant on dollar funding. This is mainly driven by decreases in cross-border lending to banks and the non-bank private sector, highlighting potential channels for the international transmission of US monetary policy.
Chapter 3 assesses the effects of the US money market fund reform of October 2016 on syndicated bank lending and more broadly examines the relevance of dollar funding from US money market funds. I exploit the heterogeneity in foreign banks' reliance on US money market funds to uncover whether the decline in dollar funding attributed to the reform affected their lending. I find that although larger exposure to US money market dollar funding is attributed with larger declines following the reform, this did not pass through to dollar denominated lending, contrary to conventional wisdom. I find that banks substituted for some of the loss in dollar funding by increasing borrowing from US government money market funds, but this was not sufficient to offset the loss in funding. My results thus suggest that global banks have access to substitute sources of dollar funding that smoothed the loss in dollar funding on lending.
- Pham_columbia_0054D_15165.pdf application/pdf 1.72 MB Download File
More About This Work
- Academic Units
- Thesis Advisors
- Clarida, Richard H.
- La'O, Jennifer
- Ph.D., Columbia University
- Published Here
- April 12, 2019